* Market thinks Fed will not begin QE just yet but cautious
* Intervention fear keeps yen buying in check
* Australian dollar below 2-year peak after RBA minutes
By Hideyuki Sano
TOKYO, Sept 21 (Reuters) - The dollar fell on Tuesday towards a five-week low against a basket of currencies, with traders cautious ahead of a Federal Reserve policy meeting that may discuss the need for further easing.
It struggled at 85.50 yen, supported by fear of Japanese intervention below that level but unable to rally, while the Australian dollar remained up near a two-year peak.
Few traders expect the Fed to apply another dose of quantitative easing (QE) just yet -- and the dollar could advance short-term if that view proves correct.
But some said the greenback was unlikely to gain much respite as the policy-setting Federal Open Market Committee (FOMC) would probably signal its readiness to take QE steps if needed, keeping expectations of more dollar-printing intact.
"The pressure will still remain (on the dollar). The FOMC is caught between a rock and a hard place. They would like to have an outlook on the economy that is a bit rosier than it actually is," said Robert Reilly, head of trading, flow, fixed income and currencies for Asia at Societe Generale in Hong Kong.
"But in reality the way the market's pricing and looking at it, the market is looking for the FOMC to come out and indicate that further measures in terms of quantitative easing will maybe remain and this will be negative for the dollar."
The dollar index fell 0.2 percent to 81.14, towards a five-week low of 80.865 hit last week.
"I'm not sure the market's going to get too much resolution after the FOMC today. Even if they don't signal any imminent QE, the market's speculation is more focused on the next few months," said Sue Trinh, senior currency strategist at RBC in Hong Kong.
The dollar fell 0.2 percent against the yen to 85.55 yen, keeping a tight range after Japan intervened in the market last week for the first time in six years.
It has failed to get above its post-intervention high of 85.94 yen set last Friday, capped by Japanese exporter selling ahead of half-year book-closing on Sept. 30, and more sales are expected towards the 86 yen level before then.
Its 55-day moving average, now at 85.87 yen, has become a resistance level since Japan intervened last Wednesday, and further resistance lies at 86.26, the bottom of its daily Ichimoku cloud.
Rangebound yen trading since intervention has helped bring down dollar/yen options' implied volatilities. Its one-week volatility dropped to around 10.65/12.05 percent after shooting up close to 15 percent right after intervention.
In short-dated options for up to two weeks, demand for dollar calls is stronger than dollar puts, meaning dollar calls are trading at a premium to yen calls. Dollar puts are normally more expensive due to Japanese exporter hedging demand.
Option traders said dollar calls with strike prices above 90 have been traded as some market players sought protection against a possible jump in the dollar in the event of intervention.
Some market players don't rule out another push by Japanese authorities to shunt the greenback over 86 yen. Many doubt they would let the dollar fall below 85.00.
Still while short-term short dollar positions may have been cleared out by last week's action, longer term players are said to remain short.
"History shows intervention hasn't been successful over the medium term. This year strength in the yen has been more of a dollar weakness story and we think that's going to continue, against other Asian currencies as well as the yen," SocGen's Reilly said.
"A lot of longer term players have profited very well from being long the commodity currencies and will continue to be positioned that way and short the dollar."
The commodity-linked Aussie held near a two-year high of $0.9495 hit on Monday after the head of its central bank suggested Australian interest rates would rise further.
It rallied again briefly after minutes of the central bank's September meeting showed policy makers think interest rates are likely to rise.
But talk of a large option barrier around $0.9500 with expiry at the end of the month helped cap its progress higher.
The euro edged up 0.2 percent to $1.3090, less than a cent below a five-week high at $1.3160 hit on Friday, despite renewed worries over some euro zone countries debt.
A triangle is forming on the hourly euro/dollar chart with parameters of $1.3100 and $1.3030.
While the euro holds above the $1.3030 area, some chartists see its Aug. 6 high of $1.3334 as an upside target, but there are hurdles before it gets there, including the triangle top and its 200-day moving average which comes in at about $1.3220. (Additional reporting by Charlotte Cooper and Reuters FX analysts Krishna Kumar in Sydney and Rick Lloyd in Singapore)